Clayton's cover gives levy the slip

By Mark MetherellNovember 9 2002

Private health funds are helping high income earners avoid a tax surcharge by offering low-cost "Clayton's insurance" policies, according to a survey.

The findings by public interest group the Australia Institute showed a Federal Government bid to prevent "extensive tax avoidance" by high earners taking out cheap policies had failed, the institute director, Clive Hamilton said.

The study cited recent Australian Bureau of Statistics figures which showed up to 477,000 high income households had taken health insurance partly or solely to avoid the 1 per cent Medicare levy surcharge.

Many households could be expected to take out policies costing hundreds of dollars a year less than the levy, the institute's research has concluded.

"These Clayton's health insurance policies - the health insurance you get when you don't want health insurance - are unlikely to result in any significant shift in health costs from the public system to the private system but do represent a large drain on public revenue," Dr Hamilton said.");document.write("

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The institute research said a conservative estimate of the tax avoided through the Clayton's policies was $99 million a year, but could be as high as $180 million.

The institute surveyed health funds and found most of the big funds offered bottom of the range policies costing less than the minimum surcharge - $500 for singles earning more than $50,000 and $1000 for couples/families on more than $100,000.

The report said there was "extensive anecdotal evidence" that tax accountants urged high income clients to take out low-priced cover even if they had no desire to be insured. When institute researchers called health funds and asked about the cheapest policy available to avoid the Medicare surcharge, typical responses were: "We have a policy just for that"; "We have had a lot of inquiries for tax purposes"; and, "Do you need it just for tax purposes?".

Low cost options for singles included an NIB policy at $275.65 a year and AXA at $404, which were for private treatment in a public hospital only, with excesses of $400 and $500 respectively.

HCF offered public and private hospital cover at $223.85 but with an excess of $100 a night, and Medibank $304 with a $250 excess.

These compared with standard policies for singles of $700-$800 a year.

After reports that many high income taxpayers were buying cheap insurance to escape the Medicare surcharge, the Federal Government in 2000 limited the front end deductible or excesses health funds could demand to $500 for singles and $1000 for couples and families.

But these limits appeared to have failed and had done little to reduce demand on public hospitals, the Australia Institute report said.

A spokesman for the Health Minister, Kay Patterson, said the Government did not agree that the low-premium strategy constituted tax avoidance. The reality was that those on low-cost policies ended up paying more when they did need hospital treatment.

But Dr Hamilton said large numbers of people with private insurance did not use it when they entered public hospitals and the excesses on cheap policies were considered to be a major reason for this.